The aim of this paper is to use agency theory as the theoretical framework for an examination of the government-university relationship and to assess the main strengths and weaknesses of the theory in this context. Because of its logically consistent framework, agency theory is able to manifest many of the complexities and difficulties that governments face in their attempts to govern universities. Agency theory also offers unique explanations for the government's choice and use of certain governance procedures, low performance by universities and cost growth in the higher education sector.